Cost of wind mill for allowing depreciation- a study

[CA DEV KUMAR KOTHARI]

Links and references:

ACIT  Vs.  Shri Rikhab Chand Jain and Vica-Versa 2016 (7) TMI 613 - ITAT KOLKATA  and cases referred to therein:

1. M/s. Asian Handlooms Versus Deputy Commissioner of Income Tax Circle-II, Trichy. - 2012 (10) TMI 351 - ITAT CHENNAI

2. Assistant Commissioner of Income Tax (OSD) Versus Parry Engineering & Electronics P. Ltd. - 2012 (10) TMI 224 - ITAT, AHMEDABAD

3.  CIT v. Karnataka Power Corporation (2000 (7) TMI 72 - SUPREME Court)

General cost of plant and machinery:

Cost of any plant and machinery, in view of author, must include all related costs which are essential to put and keep machine in a suitable working condition with proper arrangements for its up-keep, repair and maintenance.  Therefore, the following costs can form part of cost of any plant and machinery:

a. Expenses for purchasing, transportation and installation

b. Any statutory levy for purchase, installation and precondition for putting to use the machinery. (andnot levies for running and use).

c. Expenses for installation shall, for example, include:

1. Foundation, base for putting the machine on ground, and walls Fittings
2. Electrification required for running the machine,
3. At least one set of spare parts which can be required for up-keep and maintenance at any time(however, if parts are of durable nature, then they need not be added in cost of machine but can properly be treated as stores and spares – an item of inventory).

The housing for machine:

The housing in which machine is placed can also form part of cost of machine if it is specially designed for the machine and is essential as well as integral part of machine. For example if machine or process carried out by it require controlled atmosphere, then the housing designed to maintain such atmosphere will be a part of cost of plant and machinery, In fact in such circumstances, the particular process house or process centre in entirety will be a ‘plant’ for example ‘withering trough process centre’ and ‘fermentation centre’  in tea factory,  power house in any industry.     

However, if the housing is simply to provide a space to work then such housing will be building and not part of plant or machinery.

Windmill:

Wind mill require strong foundation and open space around it. In case of windmill a major part of it is open on ground, some covered portion is required for safety and controlling devices administrative purposes etc. Therefore,  cost of all such items as discussed above including cost of structure (may be open or closed structure in otherwise nature of building) are integral part of wind mill.

A windmill converts the energy of wind into rotational energy by blades rotating in air. Centuries ago, windmills usually were used to mill grain and / or  pump water and were knows as  gristmills, windpumps. The majority of modern windmills take the form of wind turbines used to generate electricity, or windpumps used to pump water, either for land drainage or to extract groundwater.

Wind Mills and Wind Turbines:

Windmill and Wind Turbine are  not the same thing. Actually  both are  unique and different in many ways. The windmill was made to help pump water and grind grain very similar to the water wheel. Wind turbine  is used  to produce energy for a clean and safe environment.  Both the windmill and the wind turbine have their own features.

The windmill is a much shorter machine then that of a  Wind Turbine. The Wind Mill uses more blades to catch more wind power thus causing more physical work to be produced. The blades are generally connected to an axle and they lead to the gears of a pump or that of a grinding wheel to help generate irrigation for crop production.

  Windmill

 

 

           wind turbine.

Blade less wind turbine.

 

Observation of author:

As discussed by the author entire cost required to put the plant or machinery in working condition is required to be included in cost of plant and machinery. The rate of depreciation will be as applicable to particular type of plant and machinery and the use for which it is put to use. The benches of Tribunal has taken similar view and upheld inclusion of civil work, foundation, electrical work, payment to GEDA etc. to form part of cost of wind mills.

Kolkata Tribunal has held that the learned AO was not right in disturbing written down value of asset brought forwarded. If he wanted to change the cost then he should make reassessment in earlier years. In this manner, it appears that even cost of land has been considered as part of wind turbine. On review of details of costs we find that in fact cost of land is not much, other costs to make that land suitable for installation of wind mill should form cost of windmill. The Tribunal has taken a reasonable view that once the cost of this block was determined in earlier year, including cost of land, it shall continue so. It can also be considered a correct and proper view because consistency need to be followed and the amount of cost of land was nominal whereas cost of making land suitable for wind turbines was greater. In fact in the circumstances, it can be said that once wind turbine is installed, the cost of land really lost character of such cost because the plot of land has been dedicated for wind turbine, and till wind turbine exist, the land as such cannot be used for other purposes. Furthermore, after introduction of concept of ‘block of assets’ , WDV b/f can be considered as final and law as applicable in respect of  ‘actual cost’  of each asset to be determined by AO, every year, may not be applicable in case of ‘block of assets’.

Ahmedabad bench in case of Parry Engineering & Electronics P. Ltd had restored the issue that if borrowed funds were used to purchase land, then interest element pertaining to land shall not form part of cost of windmill. Here it seems that the issue was new one and not related to earlier years in which matter was settled as in case before Kolkata Bench of ITAT in case of Shri Rikhab Chand Jain. Therefore, it can be said that there is difference in view of two benches, however, that difference is not due to nature of costs but because of settled issued in earlier year and open issue in current year before the Bench.

Revenue must avoid litigation on such issues:

Issues like depreciation, stock valuation, and disallowance in one year and allowance in next or subsequent years should not be area of litigation by revenue. The litigation in one year makes uncertainty in many years.  An early allowance can be very meaningful for the assessee as a tax payer but for the revenue of GOI it really does not make much difference if a deduction is allowed in first year, or lesser number of years or greater number of years.

For example, an addition made in stock valuation is nullified in next year. Depreciation allowed at lower rate in greater number of years is just causing some delay in tax collection for revenue. In totality  all such additions taken on all India basis really do not make much difference for the GOI whereas for tax payer it can cause impassive impact.

Particularly in case of high cost depreciable items, and industry requiring higher investments, it is observed that losses are carried forwarded, sometimes losses lapse also. Still we find that revenue indulge into litigation by making additions and disallowances which have no impact immediately and even in foreseeable future.

Such additions causing litigation and distraction of attention of tax authorities from other important aspects must be avoided.